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Senate Republicans press S&P and other credit firms for methodology on corporate ESG rankings

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Rating member Senator Pat Toomey (R-PA) queries the witness throughout the Senate Banking, Housing, and Urban Affairs Hearing to look at the President’s Working Group on Financial Markets report on Stablecoins in Washington, D.C, U.S., February 15, 2022.

Bill O’Leary | Reuters

Rankings firms that assign environmental, social and governance rankings to corporations — a multibillion-dollar endeavor — are coming under scrutiny within the Senate.

Retiring Sen. Pat Toomey, R-Pa., the rating member of the Senate Committee on Banking, Housing and Urban Affairs, sent letters to greater than a dozen rankings firms requesting transparency within the methods used to assign ESG rankings to corporations, in accordance with an announcement Wednesday.

ESG rankings assess how corporations align with sustainability goals equivalent to greenhouse gas emissions, labor practices or water sustainability. In May, the Securities and Exchange Commission proposed two rule changes to stop misleading or deceptive claims by U.S. funds for ESG qualifications and to extend disclosure requirements for those funds.

The proposed changes followed a algorithm introduced by the SEC in March that required publicly traded corporations to reveal how climate change risks affect their business and supply more details about their impact on the environment in addition to carbon emissions.

Within the statement, Toomey said ESG rankings firms have a singular ability to influence helpful global ESG assets. These assets received roughly $649 billion in investments in 2021 and comprise about 10% of worldwide fund assets.

The senator requested copies of nonproprietary methodologies utilized by the firms to evaluate rankings by Sept. 28 in letters sent to credit raters. He also asked for descriptions of compliance burdens on the rated corporations, data collection methods, possible political biases and conflicts of interest by Oct. 5.

Toomey said that, though ESG rankings firms consider information beyond the extensive public disclosures that corporations are required to make under federal securities laws, many consider information that’s “not material or financially relevant” under those laws.

The letters were sent to rankings firms MSCI, ISS, Bloomberg, Sustainalytics, Moody’s, Carbon Disclosure Project, S&P Global, FTSE Russell, RepRisk, FactSet, Refinitiv and Arabesque S-Ray.

Republicans on the Senate committee plan to press bank CEOs on ESG issues during an annual oversight meeting of the nation’s largest banks on Thursday, an aide for Toomey said.

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